We needed China-style Float PolicyThe Australian Financial Review
As one of three recalcitrant senior Treasury officers summoned in December1983 to Cabinet, we were quickly informed that the exchange rate would float and virtually all exchange controls removed.
For space reasons John Stone's excellent analysis (Keating's account was seriously inaccurate, AFR 12 December) omitted some issues overlooked by Cabinet.
First, contrary to the Reserve Bank's major argument justifying the float, the elimination of changes to the money supply from foreign sources would not itself assure improved monetary policy. Indeed, over the next five years credit grew at 20 per cent per annum, inflation ran well above the average in the Organisation for Economic Cooperation and Development and the 1980s ended with Paul Keating's recession we had to have.
Second, contrary to the argument that $A speculation would be reduced, during the 1980s the Bank undertook extensive interventions to manage the exchange-control-free float; that is, other policies did not allow the $A to float freely.
Third, although many naively believed floating would ensure Australia's international competitiveness, they overlooked the need for other policy adjustments. Without them, the large initial real $A depreciation still left Australia almost a banana republic in 1986.
Finally, no consideration was given to whether Australia's then highly regulated economy should be exposed overnight to wholesale deregulation offoreign exchange markets.
Treasurer Costello excuses China, despite its extensive exchange controls, from floating its currency because it needs other policy adjustments first.
Australia needed similar medicine in 1983.